Hedge funds still hold all the aces

The future of Nine Entertainment has descended into a game of brinkmanship between the various lenders - deadlines are set and reset, proposals are served and counter-proposals are returned - and all of them are getting contingency plans ready for the potential scenario that the business could be declared insolvent.

Today holds yet another deadline. By this afternoon, or tomorrow, a decision may have been made to place Australia's oldest broadcasting brand into the hands of corporate undertakers, who will potentially sell off the bits, limb by limb.

The main protagonists have each hired firms of corporate insolvency practitioners, ready to send their teams into the company started by the Packers when television was born in the 1950s.

It's by no means a certainty. A deal between the parties that are now squabbling over about $70 million could find some meeting in the middle, or the dance could go on for another music set.

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The first are the primary lenders that stand first in line to take the spoils are a couple of US hedge funds, Oaktree Capital and Apollo Global Management, which have been beating their chests and saying they are prepared to place Nine into the hands of administrators.

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Then there are the second-ranking lenders, led by Goldman Sachs, who have said they have put a final offer on the table and will not budge.

Finally there is the company's board and management, which have been trying to broker a deal.

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In a strictly financial sense, the hedge funds, which are owed $2.3 billion, should be the only parties with any say in what happens. Based on what the company earns today, its value would be no more than what the hedge funds are owed.

At first blush, the fact that they are even entertaining giving something to Goldman Sachs makes no sense.

Under a more usual case, these tier 1 lenders with security over Nine's assets would install a receiver, sell the business and take the money. Goldman Sachs's mezzanine lenders would get nothing and the equity holders would be mere bystanders.

But this is not normal. There are complications because the hedge funds want to swap their debt for equity, rather than take the money and run.

This is because when the advertising drought breaks and Nine's revenue picks up it will be worth more, and the hedge funds want a piece of that action.

Under this scenario, if Goldman can get its hands on a bit of the Nine equity it could also rescue some of the $1 billion it ploughed into the company when the media market recovers.

The future of Nine Entertainment is nothing more than financial for these lenders, but for the company itself the ignominy of being placed into the hands of administrators is far worse.

There is a risk that senior management may leave or be replaced. Given that Nine has a well-regarded team, this would be a negative for its long-term prospects and the brand would sustain some damage.

There are also dire legal consequences for Nine's directors if they are trading when the company is insolvent. Thus the company's board cannot afford to take a back seat and allow the lenders to slug it out. They have plenty of skin in the game.

In a practical sense, lots of things change when a company is placed into administration.

Contracts for programming can be compromised, employment contracts can be reset and, most importantly, advertisers can be scared off by the uncertainty.

Next month Nine will be undertaking its annual beauty parade of programs - the line-up that it will show its advertisers and media buyers for next year.

On the back of this showing, the media buyers will decide how much money to spend on contract advertising for next year. It's a big day on the television network's calendar. If Nine is in administration, or even under the threat of administration, its prospects to entice advertisers will be diminished.

(On the upside, an administration would work well to release it from one of the previous program deals that it negotiated when times were better. For example, the $500 million deal with the US studio Warner is one that could do with a bit of renegotiation.)

But there are other potential program deals that could be put at risk if Nine's financial house is not settled. For example, the Australian tennis and cricket rights are coming up for negotiation.

The uncertainty surrounding Nine is giving its competitors Seven and Ten - who are in the market for sports programs - a free kick.

The television market's revenue is at a particularly low ebb and any advantage that competitors can get would be greatly appreciated.

As viewers we would probably not even notice a difference to Nine's business in the short term. Both Seven and Ten were in the hands of administrators in the 1990s.